Economic Modelling
Lecture 7
Convergence and Divergence in the Global
Economy
1
GDP Perhead in Hull and the UK 1998
20,000
18,566
18,000
16,000
14,000 12,548 12,845
13,402
12,117
11,759 11,850
12,000
9,754 10,063
10,051
10,000
8,000
6,000
4,000
Northern Ireland5
London
East Riding of Yorkshire
East Riding and North
Lincolnshire
0
United Kingdom
2,000
2
Meaning of Convergence and Divergence
Prediction of convergence
Solow Model: Catching up
under Growing apart
High income
High income
Y/P
Income
Y/P
Divergence
Low ncome
Low income
Time
Time
A poor country should grow
at faster rate than a rich
country as it has higher marginal
productivity of capital.
Evidence from African
Countries shows divergence.
3
Two concepts of Economic Convergence
Dispersion Measure: variance of
growth rates should decline over
time

Convergence
g
g
Time
 ln y   ln  y 
2
t 
i
N  1
t

Convergence


R
R
R
ln Yt    0  1 t
HI
1
LI
1
Time
Reduction in the standard
deviation over time
i ,t
Mean Difference
Low income regions should
grow faster than high income
regions.
4
Marginal productivity of Capital in Rich and Poor
Countries and Capital Accumulation in Autarky
MPKP
MPKR
rp
rR
KR
KP
5
Marginal productivity of Capital in Rich and Poor
Countries and Capital Accumulation After Globalisation
MPKP
MPKR
rP
rp
RG
rR
KR
KP
6
Marginal productivity of Labour in Rich and Poor
Countries Before and After Globalisation
MPLP
MPLR
wR
wR’
LR
LR’
LP’
LP
Poor Country
Rich Country
7
Who Gain and Who Lose From Globalisation?
Capitalists in rich
countries and
workers in poor
countries gain.
rp
rR
MPKR
MPKP
wR
wR’
wp’
MPLR
MPLR’
wp
MPLP’
MPLP
8
Factor Mobility and Convergence


Yi  Ai K i Li
   1
Convergence
No
convergence
 1
and
0   1
0  1
 1
and
KMobile
L-mobile
K-Mobile
L-mobile
K-Mobile
L-mobile
yes
no
yes
no
no
yes
yes
no
yes
no
Yes
no
9
Factors Promoting Convergence
• Domestic factors
–
–
–
–
–
–
Saving
Investment
Population growth rate
Human capital
Technology
Development of
infrastructure
– Sound economic policy
– Homogenous and stable
society
– Transparent rules and
regulations
• Global factors
– Trade of goods and
services
– Inflow and outflow of
capital
– Emigration or
immigration of skilled and
unskilled labour
– Adoption of better
technology
– Growth of the global
economy
– Peace/Oil prices
10
Autarky and Saving and Capital
(Gartner (2003:262) has similar example)
Country A
Country B
YA  K A0.5 L0A.5
 A  0.1
YB  K B0.5 L0B.5
s A  0.2
sB  0
What is the capital stock in the
steady state in A in Autarky?
How much do workers get?
How much do owners of
capital get?
sK A0.5 L0A.5   A K A
0.2 K A0.5 10  0.1K A

K A  400
 B  0.1
What is the capital stock in the
steady state in B in Autarky?
How much do workers get?
How much do owners of
capital get?
0.0 K B0.5 10  0.1K B
 K B  0 YB  0
 Becomes a beggar country.
YA  200
11
Impacts of Globalisation in Output and Income
What is the capital stock in the steady state in A and B
if there is a free mobility of capital?
Country A
Country B
K A  KB  K
K A  KB  K
Country A saves for both
countries. It receives rental
income from country B.
Country B does not save
but can borrow capital from
country A.


0.2 10 K 0.5  0.5  10 K 0.5  0.1K  K 
K  15  225
YB  K 0.5 L0B.5  225 0.5  10  150
2
YA  K 0.5 L0A.5  225 0.5  10  150
GNP in country B =
GDP+Investment Receipts
GNPA = 150+75 = 225
Capitalists gain and
workers lose in country A.
Country B need to pay
capital income to Country
A.
GNP in country B = GDPInvestment Payments
GNPB = 150-75 = 75
Country B gains from the
capital transfers.
12
Evidence of Convergence Among OECD economies
They rate growing at about the same rate
GDP per capita (constant 1995 US$)
1960
2000 Y00/Y60 growth rate (1960-2000)
Austria
10596
32763 3.092016
2.822
Belgium
10335
30830 2.983067
2.732
Denmark
16287
38521 2.365138
2.152
Finland
9769
32024 3.278125
2.968
France
10611
29811 2.809443
2.582
Greece
3818
13105 3.432425
3.083
Hungary
1514
5425 3.584302
3.191
Ireland
5462
27741 5.079002
4.063
Italy
6606
20885 3.161663
2.878
Luxembourg 15772
56372 3.574182
3.184
Netherlands
11999
30966 2.580715
2.370
Norway
11322
37954 3.352235
3.024
Portugal
2735
12794 4.678735
3.858
Spain
4620
17798 3.852798
3.372
Sweden
13165
31206 2.370376
2.158
Switzerland
26245
46737 1.780796
1.443
13
United Kingdom 9496
21667 2.281698
2.062
Lack of Evidence of Convergence among Low Income
Countries and Convergence among newly emerging
economies: Average Annual Growth Rate of Per Capita
Income (%) and Its level in 1960
1960 angrrate
Central African Republic
457 -0.746708
Chad
290 -0.713465
Ghana
450
-0.2145
Haiti
547 -0.997717
Madagascar
383 -1.106759
Nicaragua
638 -0.785382
Niger
386 -1.606578
Senegal
670 -0.238649
Sierra Leone
223 -1.041848
Venezuela, RB 3720 -0.299503
Zambia
648 -1.256572
1960 agrrate
China
112 4.989179
Hong Kong, China
3008 5.214552
Ireland
5462 4.062741
Korea, Rep.
1325 5.720737
Japan
8399 4.186912
Malta
1177 5.404178
Portugal
2734 3.858026
Singapore
2676 5.890155
Thailand
465 4.492804
Conditional Convergence
14
Results from Cross Country Growth Studies -1
• A low initial level of income is associated with
higher growth rate in subsequent periods when
other variables are held constant.
• Growth rates are higher when the ratio of
investment to GDP is higher.
• Growth rates are higher in countries which have
larger stock of human capital per capita.
• These are reflected in terms of enrolment in the
primary and secondary schools.
• Population growth rates are negatively
associated with growth rates.
15
Results from Cross Country Growth Studies -2
• Countries with distorted markets have lower growth
rates.
• Distortions occur in exchange rates and prices or by
impediments to a free and fair trade.
• Countries with efficient financial system have higher
growth rates.
• Size of the financial markets is measured as a ratio of
liquid assets to the GDP.
• Countries with political instability have lower growth
rates.
• Frequency of revolutions, wars and coups are used to
measure political instability.
16
Is this caused by the barriers to adopt a
good technology? Or by Lauddites?
17
References
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Blanchard (13)
http://www.bris.ac.uk/Depts/Economics/Growth/
B&W 3 MS 5-6, BL 11,12 MK 7
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